ACCT13017 - Assignment One - Step Three - QANTM Intellectual Property Limited

• My Company: QANTM Intellectual Property Limited

• Webpage: http://qantmip.com/

• Links to my word document and excel spread sheet: https://moodle.cqu.edu.au/mod/forum/discuss.php?d=473991#p1267156

Who is QANTM and what are their important areas of business?

QANTM Intellectual Property Limited (QANTM) is the owner of a group of leading intellectual property businesses that operate both in Australia and overseas under three brands. These businesses are Davies Collison Cave (DCC), Freehill Patent Attorneys (FPA) and Advanz Fidelis IP (Advanz). As seen in the timeline (see image 1), DCC and FPA both have origins which were individually established in the late 1800’s. After many different acquisitions and mergers over the years, these two companies eventually came together in 2016 and QANTM was established. In 2018 QANTM also acquired Advanz which brings us to the ownership group we see today.

Each of QANTM’s three brands primarily serve large corporations and offer clients in a range of sectors services connected with the creation, commercialisation, protection, management and enforcement of intellectual property (IP) rights. These services are managed by a collection of attorneys that specialise in various fields of technology and law.

DCC is currently the largest patent and trade mark attorney firm in Australia and provides privacy & data protection, patents, trade mark design & copyright services in Australia, New Zealand, Singapore and Southeast Asian Nations, such as Thailand, Singapore and the Philippines. FPA is an Australian based top-tier attorney firm with locations in various states across Australia and also Singapore. They provide boutique style expert advice on IP rights and have access to a large full-service corporate law firm which enables them to provide expertise in the areas of tax, competition and anti-trust, mergers and acquisitions and equity capital markets. Advanz is a Malaysian IP company who specialise in the identification, development and management of IP assets, and also IP dispute resolution, education and training. Advanz was established independently in 2000 and is the only company under QANTM that does not have a base in Australia.

Areas I am having difficulty in understanding and my concerns so far

The 2019 QANTM Annual Report is quite easy to read, and uses many visual graphs, diagrams and displays to effectively highlight the key figures and successes of the 2019 year. QANTM have also provided some of their own ratios and financial figures as seen in image 3. I initially had difficulty when comparing some of these figures provided by QANTM as they didn’t seem to match to the figures and ratios I had calculated. Firstly, I had incorrectly assumed that the ‘net profit after tax’ (NPAT) worth $14.8 million (image 3) would have been the NPAT on the Income Statement. However, I discovered that the $14.8 million is the underlying NPAT while the figure shown on the Income Statement ($11.2 million) is the statutory NPAT (see image 2). I had not heard of these two different types of NPAT’s so this proved to be a good opportunity to learn. From my new understanding, I have determined that underlying NPAT, or profit, is a better indicator than statutory profit as it shows how the business is performing. It is generally an indication of what the business may do in future years if all other factors remain the same. Statutory profit is calculated by adding a once off gain (or loss) to the underlying profit, such as the sale of an asset. Selling an asset will not happen each and every year; therefore placing too much weight on this figure will not reveal the true picture of how the business may perform in future years.

QANTM shows their operating expenses in image 3 as $67.1 million, yet the operating expenses that were calculated in step 5 of this assignment came to $98.9 million. The notes to the financial statements have been checked and it can’t be seen anywhere how the operating expenses figure was calculated. This variation in the calculation is something that I am still having difficulty with as I do not know which figures have been incorrectly allocated when restating the financial statements. The statutory return on shareholders’ equity (15.9% - see image 3) is equal to the ratio that was calculated in step 7 of this assignment which is reassuring.

Another difficulty I came across during this assignment was completing some of the ratios for the 2016 financial year. The official listing date for QANTM on the ASX was 31 August 2016. This means that there are many missing figures for the 2016 year such as dividends, issued shares and market price per share which made it impossible to work out the market ratios and some of the ratios based on the reformulated financial statements.

QANTM's key challenges and opportunities

One of the main challenges faced by QANTM in the 2019 financial year was the attempted merger with Xenith IP Group Ltd (Xenith). The initial terms of the merger were agreed with, however the merger did not proceed as Xenith received a competing offer that was accepted. QANTM was not prepared to match that offer and, according to the Chairman, doing so would have been dilutive to the shareholders of QANTM. $2.1 million in acquisition costs related to the attempted merger were expensed in the 2019; these were partly offset by a break fee payment of $1.6 million, which is included in Other Income and was received after Xenith’s board of directors recommended a competing proposal to Xenith shareholders.

Another challenge QANTM faced in the 2019 financial year, which proved to be an important opportunity, included the acquisition of Advanz on 2 July 2018. QANTM made an up-front payment of $3.05 million for Advanz, plus two contingent payments that were based on agreed earn out formulas. These payments were accrued as remuneration and resulted in the recognition of an expense of $3.07 million in the 2019 financial year. This amount can be found under ‘employee benefits expenses’ on the Income Statement. The directors of QANTM are confident that the expanded presence of Advanz in Malaysia will contribute more meaningfully to group earnings in future years. Richard England, the chairman of QANTM, stated that Advanz had already met expectations in terms of revenue by the end of the 2019 year, and that material uplift seen in patent applications is a favourable development for future revenue generation as well.

Another interesting point that I came across that may provide a challenge is the threat posed by the World International Patent Organisation, which has made repeated attempts to make it easier to file patents internationally, bypassing patent attorney firms altogether. While this would certainly affect QANTM and their international work if it were to happen, the risk remains low as getting hundreds of countries to agree to a standardized system is no easy feat.

Another interesting point to note is that even though the dividend paid to the shareholders in the 2019 year was 17 percent higher than that of the previous year, the chairman did acknowledge that the share price performance is yet to be fully delivered. Leon Allan, who was the managing director of QANTM in the 2019 year and has since re-joined the Board as a non-executive director, advised that the higher operating expenses this year were a consequence of increased expenditure associated with the people of QANTM; the staff and partners. Mr Allan has said that this increased investment in the business will also be a feature in 2020 and something to keep an eye on.

QANTM's apparent strategy

It appears as though one of the main strategies of QANTM moving forward is to continue broadening their international client base. In the 2019 financial year QANTM acquired Advanz in Malaysia, DCC opened a new office in New Zealand and FPA opened a new office in Singapore. QANTM also attempted to merge with Xenith (which was ultimately unsuccessful), yet the chairman of QANTM said he was confident that many of the opportunities arising from the attempted amalgamation will be able to be secured in other ways. Leon Allen, who is in the management team, has said his team will continue to assess and pursue growth opportunities, both organic and through acquisition. QANTM also listed the following main elements of their strategic focus moving forward on their 2019 financial report:

• Focus on revenue growth from the existing business model

• Development and expansion of an IP services business in Asia, initially executed through a strategy of establishing a Singapore office presence for both DCC and FPA

• Maintaining and enhancing internal organisational capabilities through the attraction, retention and provision of career advancement and the provision of share based incentive arrangements aligned to shareholder interests.

Discussions had with other students

One of the main students I interacted with during this assessment was Jemma Ahmann. The following points were our main topics of discussion:

who our companies are

• what our companies do

• the main difficulties we had come across when looking into the financial statements

• why Jemma’s company would sell off one of their strongest performing branches

• my 2016 ratios (or lack thereof)

• what we think the future holds for our companies.

I really enjoyed speaking with Jemma about our companies and I found it really helpful. She brought up points that I had not considered which allowed me to look at a few aspects of my company in a different light.

News articles/blogs/videos etc

One of the more interesting articles I found about QANTM was cleverly named ‘Studying QANTM’s Mechanics’ (https://www.intelligentinvestor.com.au/investment-news/studying-qantms-mechanics/146670). This article describes some of the successes QANTM has found but also discusses why they are not the leader in their field and why they are not joining the Intelligent Investor ‘buy list’. The Intelligent Investor mentions that while QANTM is a good business, it won’t improve its growth prospects unless it expands beyond the Australian market – something which had been mentioned in the 2019 financial reports and also aligns with what I thought their strategy may be in the future. Interestingly, the Intelligent Investor mentioned that the marketplace has discarded QANTM as a top business due to its false starts and the unsuccessful merger with Xenith.

What are my three favourite blogs from other students?

1. Jemma Ahmann - https://jemmyahmann28.wordpress.com/

Jemma’s blog was probably my favourite blog that I have come across in this assessment. The bright design on the home page is really eye catching and draws the reader in. I often find that it is easier to read and explore a blog when it is visually appealing which this one certainly is. Her blog was also easy to navigate.

2. Kiah Frahm - https://kiahfrahm.wixsite.com/blog

Kiah’s blog post was not only visually appealing, but it was also easy to navigate. I also really enjoyed reading her personal recommendations on books and podcasts – this provided a nice individual touch which stood out.

3. Kate Donohoe - https://finalaccountdown.wordpress.com/

Kate’s blog was really simplistic – which is exactly why I loved it. She also provided really short and succinct captions about each step of the assignment which gave a good overview of where the blog post was heading and what it contained.

How was the support from Studiosity?

Studiosity is an online after-hours study and learning support program that provides expert feedback in 24 hours or less. I found the assistance from Studiosity not overly helpful with this assignment, but this was due to my own fault. The draft that I had uploaded was nowhere near complete and I knew that there were quite a few errors with the structuring and the contents. The feedback points I received were very valid, however they were quite generic and I feel that if I had uploaded a more complete draft then they may have been more specialised and relevant to my assignment. Some of the review points I received were as follows:

• Ensure that readers can clearly identify the different sections and consider using bold section headings.

• When referencing figures or diagrams, consider cross referencing them. Instead of saying: “image 2 below”, consider using words like “figure 2 illustrates..” The word ‘below’ simply confuses readers.

• There are minor spelling and grammatical revisions that are needed, and ensure to check verb tense.

Many of these points were items that I had already revised and fixed before I received the feedback from Studiosity. I believe that this would have been a fantastic learning tool had I only uploaded a more complete draft, that way I would receive more relevant feedback.